Letter from Houston: Energy hotspot hopes for a ‘bronze lining’
The US oil capital may be battling both the oil price crash and a Covid-19 resurgence, but there are still reasons to be optimistic
Houston is a hotspot in more ways than one. As well as its sultry summers, it also places energy front and centre in its corporate and civic life and boasts the US’ largest concentration of energy jobs.
But, during the coronavirus pandemic and resulting economic recession, Houston—and Texas more widely—have witnessed energy job furloughs and losses by the thousands, as well as oil and gas producers slashing budgets and, in the worst cases, filing for bankruptcy. Texas is also reporting one of fastest-growing of the country's resurgent Covid-19 outbreaks.
The impact of the collapse in oil prices on Texas-based E&P firms, while significant, is perhaps not as harsh as it might have been. The industry is much slimmer than it was during the last oil price bear-run in 2014–16. And, looking ahead, if a silver lining in the clouds above the Texas oil patch may be too much to hope for, a bronze lining may be achievable.
Of the more than 74,000 energy jobs lost in Houston during 2014–16, only around 27pc returned. Thus, the city’s energy sector, which employs roughly 250,000 people, is already running leaner and more efficiently. Job losses in 2020 are estimated at c.10pc—a much smaller impact than was seen five years ago. And while the nationwide rig count plunged by more than 80pc in 2014–16, a smaller drop of 65pc was recorded during the mid-March to mid-June lockdown peak.
c.10pc – Job losses in 2020
But, with most forecasts seeing oil prices not much higher than $40/bl through to 2022, Houston will face a protracted upward climb. And c.40pc of the Houston economy is tied to oil, meaning that the city's economic recovery could lag other parts of the US.
Even the midstream sector, which has some insulation from oil price volatility, is now seeing the knock-on effects of production declines and spending cuts. Ratings agency Moody's projects that pipeline and storage operators will see their collective Ebitda decrease by 5pc this year.
Houston is also a corporate centre for the LNG export industry that has mushroomed all along the US Gulf of Mexico coast. Current global gas prices do not make for pretty reading for exporters, but again there is hope on the horizon.
Asian LNG prices are anticipated to make a sharp recovery in the fourth quarter, which will lend support to US-loading cargoes currently facing cancellations and prices of c.$2/mn Btu. And delayed FIDs on several major LNG export projects worldwide should tighten the LNG market by the middle of decade. This should boost the bottom lines of export projects now operating, as well as those already committed to coming online within the next 4–5 years.
Some Texas LNG exporters are, though, among those pushing FIDs back to at least 2021—including Freeport LNG, Rio Grande LNG (operated by Next Decade), Port Arthur LNG (Sempra Energy) and Corpus Christi LNG (Cheniere Energy).
The renewables sector is another often-overlooked opportunity for the Houston energy sector. Tax credits and opportunities for offshore wind energy are attracting investors to the US—and Texas is one of the country's top producers of wind energy. In 2019, Texas accounted for 28pc of the country's produced wind power and most of its installed wind power capacity. As long-term investments, renewable energy projects are resilient to short-term economic challenges and offer Texas wind energy the ability to expand its reach and brand.
But, to some extent, the recovery of the Houston energy economy is intertwined with the unpredictable path of the Covid-19 virus. Forecasts for a return to ‘life as normal’—and its commercial corollary ‘business as usual’—remain intimately tied to as-yet unanswered questions about subsequent virus waves, true rates of infection and the speed of vaccine and treatment development.
With the country's second-largest population by state after California, Texas must get its virus outbreak under control, and quickly. Given the range of scenarios still possible, looking for this bronze lining is perhaps the most realistic aspiration for Houston's energy hotspot.
Adrienne Blume is Executive Editor, Hydrocarbon Processing and Editor-in-Chief, Gas Processing & LNG